2020年CFA二級SchweserNotesBook1：道德和職業(yè)標準、定量方法和經(jīng)濟學

personalbankruptcy.Hutchinsfeelsthatherbusinesspartner,JohnSmith,ismostlyto

blameforhersituationsince“hedidnotinvestenoughmoneyinherinvestment

opportunitiesandcausedthemtofail.”HutchinsreportsSmithtoCFAInstituteclaiming

SmithviolatedtheCodeandStandardsrelatingtomisconduct.Whichofthefollowing

statementsismostlikelycorrect?

A.ByreportingSmithtoCFAInstitute,HutchinshasmisusedtheProfessionalConduct

Program,thusviolatingtheCodeandStandards,butherpoorinvestingand

bankruptcyhavenotviolatedtheCodeandStandards.

B.Hutchins’sbankruptcyreflectspoorlyonherprofessionalreputationandthusviolates

theCodeandStandards,butherreportingofSmithdoesnot.

C.Hutchins’spoorinvestingandbankruptcy,aswellasherreportingofSmith,areboth

violationsoftheStandards.

2.Inwhichofthefollowinghastheanalystleastlikelycommittedplagiarism?

A.JulieLongtakesperformanceprojectionsandchartsfromacompanysheis

researching,combinesthemwithherownanalysis,andpublishesthemunderher

ownname.

B.BillCooperfindsastatisticaltableintheFederalReserveBulletinthatsupportsthe

workhehasdoneinhisindustryanalysisandhashissecretaryincludethetableas

partofhisreportwithoutcitingthesource.

C.JanNiedfeldtgetsacallfromoneofherfellowanalystsstatingthattheanalyst’s

researchshowsthatXYZCompanyisabuy.Niedfeldtcallsuphermajorclientsand

tellsthemthatherresearchshowsXYZisabuy.

3.JamieOlson,CFA,hasjuststartedworkasatraineewithNeuvoManagementCorp.,a

smallregionalmoneymanagementfirmstartedsixmonthsago.Shehasbeentoldtomake

afewcoldcallsandroundupsomenewclients.Inwhichofthefollowingstatementshas

OlsonleastlikelyviolatedtheStandardsofPractice?

A.“Sure,wecanperformallthefinancialandinvestmentservicesyouneed.We’ve

consistentlyoutperformedthemarketindexesandwillcontinuetodosounderour

currentmanagement.”

B.“Sure,wecanassistyouwithallthefinancialandinvestmentservicesyouneed.If

wedon’tprovidetheservicein-house,wehavearrangementswithotherfull-service

firmsthatIwouldbehappytotellyouabout.”

C.“Ourfirmhasalonghistoryofsuccessfulperformanceforourclients.Whilewecan’t

guaranteefutureresults,wedobelievewewillcontinuetobenefitourclients.”

4.BethBixby,CFA,usesaquantitativemodeltoactivelymanageaportfolioofstockswithan

objectiveofearningagreaterreturnthanthemarket.Overthelastthreeyears,thereturns

toaportfolioconstructedusingthemodelhavebeengreaterthanthereturnstotheS&P

indexbybetween2%and4%.Inpromotionalmaterials,Bixbystates:“Throughourcomplex

quantitativeapproach,weselectaportfoliothathassimilarrisktotheS&P500Indexbutwill

receiveareturnbetween2%and4%greaterthantheindex.”Thisstatementis:

A.permissiblesincepriorreturnstothefirm’smodelprovideareasonableandadequate

basisforthepromotionalmaterial.

B.permissiblesincethestatementdescribesthebasiccharacteristicsofthefund’srisk

andreturnobjectives.

C.notpermissiblesinceBixbyismisrepresentingtheinvestmentperformanceherfirm

canreasonablyexpecttoachieve.

5.JosefKarloff,CFA,actsasliaisonbetweenPinnacleFinancial(aninvestmentmanagement

firm)andSummitInc.(aninvestmentbankingboutiquespecializinginpennystocks).When

SummitunderwritesanIPO,KarloffroutinelyhasPinnacleissuevaguestatementsimplying

thatthefirmhascashflows,financialresources,andgrowthprospectsthatarebetterthanis

thecaseinreality.ThisactionisaviolationofthesectionoftheStandardsconcerning:

A.fairdealing.

B.nonpublicinformation.

C.misconduct.

MODULE2.3:STANDARDSII(A)ANDII(B)

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IIIntegrityofCapitalMarkets

II(A)MaterialNonpublicInformation.MembersandCandidateswhopossess

materialnonpublicinformationthatcouldaffectthevalueofaninvestmentmustnot

actorcauseotherstoactontheinformation.

Guidance

Informationis“material”ifitsdisclosurewouldimpactthepriceofasecurityorifreasonable

investorswouldwanttheinformationbeforemakinganinvestmentdecision.Ambiguous

information,asfarasitslikelyeffectonprice,maynotbeconsideredmaterial.Informationis

“nonpublic”untilithasbeenmadeavailabletothemarketplace.Ananalystconferencecallis

notpublicdisclosure.Selectivelydisclosinginformationbycorporationscreatesthepotential

forinsider-tradingviolations.Theprohibitionagainstactingonmaterialnonpublic

informationextendstomutualfundscontainingthesubjectsecuritiesaswellasrelatedswaps

andoptionscontracts.

Somemembersandcandidatesmaybeinvolvedintransactionsduringwhichtheyreceive

materialnonpublicinformationprovidedbyfirms(e.g.,investmentbankingtransactions).

Membersandcandidatesmayusetheprovidednonpublicinformationforitsintended

purpose,butmustnotusetheinformationforanyotherpurposeunlessitbecomespublic

information.

Guidance—MosaicTheory

Thereisnoviolationwhenaperceptiveanalystreachesaninvestmentconclusionabouta

corporateactionoreventthroughananalysisofpublicinformationtogetherwithitemsof

nonmaterialnonpublicinformation.

Guidance—SocialMedia

Whengatheringinformationfrominternetorsocialmediasources,membersandcandidates

needtobeawarethatnotallofitisconsideredpublicinformation.Membersandcandidates

shouldconfirmthatanymaterialinformationtheyreceivefromthesesourcesisalsoavailable

frompublicsources,suchascompanypressreleasesorregulatoryfilings.

Guidance—IndustryExperts

Membersandcandidatesmayseekinsightfromindividualswhohavespecializedexpertisein

anindustry.However,theymaynotactorcauseotherstoactonanymaterialnonpublic

informationobtainedfromtheseexpertsuntilthatinformationhasbeenpublicly

disseminated.

RecommendedProceduresforCompliance

Makereasonableeffortstoachievepublicdisseminationoftheinformation.Encouragefirms

toadoptprocedurestopreventmisuseofmaterialnonpublicinformation.Usea“firewall”

withinthefirm,withelementsincluding:

Substantialcontrolofrelevantinterdepartmentalcommunications,throughaclearance

areasuchasthecomplianceorlegaldepartment.

Reviewemployeetrades—maintain“watch,”“restricted,”and“rumor”lists.

Monitorandrestrictproprietarytradingwhileafirmisinpossessionofmaterial

nonpublicinformation.

Prohibitionofallproprietarytradingwhileafirmisinpossessionofmaterialnonpublic

informationmaybeinappropriatebecauseitmaysendasignaltothemarket.Inthesecases,

firmsshouldtakethecontrasideofonlyunsolicitedcustomertrades.

ApplicationofStandardII(A)MaterialNonpublicInformation

Example1:

SamuelPeter,ananalystwithScotlandandPierce,Inc.,isassistinghisfirmwithasecondary

offeringforBrightIdeasLampCompany.Peterparticipates,viatelephoneconferencecall,in

ameetingwithScotlandandPierceinvestment-bankingemployeesandBrightIdeas’CEO.

Peterisadvisedthatthecompany’searningsprojectionsforthenextyearhavesignificantly

dropped.Throughoutthetelephoneconferencecall,severalScotlandandPiercesalespeople

andportfoliomanagerswalkinandoutofPeter’soffice,wherethetelephonecallistaking

place.Asaresult,theyareawareofthedropinprojectedearningsforBrightIdeas.Before

theconferencecallisconcluded,thesalespeopletradethestockofthecompanyonbehalfof

thefirm’sclients,andotherfirmpersonneltradethestockinafirmproprietaryaccountand

inemployeepersonalaccounts.

Comment:

PeterviolatedStandardII(A)becausehefailedtopreventthetransferandmisuseofmaterial

nonpublicinformationtoothersinhisfirm.Peter’sfirmshouldhaveadoptedinformation

barrierstopreventthecommunicationofnonpublicinformationbetweendepartmentsofthe

firm.Thesalespeopleandportfoliomanagerswhotradedontheinformationhavealso

violatedStandardII(A)bytradingoninsideinformation.

Example2:

ElizabethLevensonisbasedinTaipeiandcoverstheTaiwanesemarketforherfirm,whichis

basedinSingapore.Sheisinvitedtomeetthefinancedirectorofamanufacturingcompany,

alongwiththeothertenlargestshareholdersofthecompany.Duringthemeeting,thefinance

directorstatesthatthecompanyexpectsitsworkforcetostrikenextFriday,whichwillcripple

productivityanddistribution.CanLevensonusethisinformationasabasistochangeher

ratingonthecompanyfrom“buy”to“sell”?

Comment:

Levensonmustfirstdeterminewhetherthematerialinformationispublic.Ifthecompanyhas

notmadethisinformationpublic(asmall-groupforumdoesnotqualifyasamethodofpublic

dissemination),shecannotusetheinformationaccordingtoStandardII(A).

Example3:

JagdishTejaisabuy-sideanalystcoveringthefurnitureindustry.Lookingforanattractive

companytorecommendasabuy,heanalyzedseveralfurnituremakersbystudyingtheir

financialreportsandvisitingtheiroperations.Healsotalkedtosomedesignersandretailers

tofindoutwhichfurniturestylesaretrendyandpopular.Althoughnoneofthecompanies

thatheanalyzedturnedouttobeaclearbuy,hediscoveredthatoneofthem,SwanFurniture

Company(SFC),mightbeintrouble.Swan’sextravagantnewdesignswereintroducedat

substantialcosts.Eventhoughthesedesignsinitiallyattractedattention,inthelongrun,the

publicisbuyingmoreconservativefurniturefromothermakers.BasedonthatandonP&L

analysis,TejabelievesthatSwan’snext-quarterearningswilldropsubstantially.Hethen

issuesasellrecommendationforSFC.Immediatelyafterreceivingthatrecommendation,

investmentmanagersstartreducingthestockintheirportfolios.

Comment:

Informationonquarterlyearningsfiguresismaterialandnonpublic.However,Tejaarrivedat

hisconclusionabouttheearningsdropbasedonpublicinformationandonpiecesof

nonmaterialnonpublicinformation(suchasopinionsofdesignersandretailers).Therefore,

tradingbasedonTeja’scorrectconclusionisnotprohibitedbyStandardII(A).

Example4:

Amember’sdentist,whoisanactiveinvestor,tellsthememberthatbasedonhisresearchhe

believesthatAcme,Inc.,willbeboughtoutinthenearfuturebyalargerfirmintheindustry.

ThememberinvestigatesandpurchasessharesofAcme.

Comment:

Thereisnoviolationherebecausethedentisthadnoinsideinformationbuthasreachedthe

conclusiononhisown.Theinformationhereisnotmaterialbecausethereisnoreasonto

suspectthataninvestorwouldwishtoknowwhatthemember’sdentistthoughtbefore

investinginsharesofAcme.

Example5:

Amemberreceivedanadvancecopyofastockrecommendationthatwillappearinawidely

readnationalnewspapercolumnthenextdayandpurchasesthestock.

Comment:

Arecommendationinawidelyreadnewspapercolumnwilllikelycausethestockpriceto

rise,sothisismaterialnonpublicinformation.ThememberhasviolatedtheStandard.

Example6:

Amembertradesbasedoninformationhegetsbyseeinganadvancecopyofanarticlethat

willbepublishedinaninfluentialmagazinenextweek.

Comment:

Thisisaviolationasthisisnonpublicinformationuntilthearticlehasbeenpublished.

II(B)MarketManipulation.MembersandCandidatesmustnotengageinpracticesthatdistortpricesor

artificiallyinflatetradingvolumewiththeintenttomisleadmarketparticipants.

Guidance

ThisStandardappliestotransactionsthatdeceivethemarketbydistortingtheprice-setting

mechanismoffinancialinstrumentsorbysecuringacontrollingpositiontomanipulatethe

priceofarelatedderivativeand/ortheassetitself.Spreadingfalserumorsisalsoprohibited.

ApplicationofStandardII(B)MarketManipulation

Example1:

MatthewMurphyisananalystatDivisaderoSecurities&Co.,whichhasasignificant

numberofhedgefundsamongitsmostimportantbrokerageclients.Twotradingdaysbefore

thepublicationofthequarter-endreport,Murphyalertshissalesforcethatheisaboutto

issuearesearchreportonWirewolfSemiconductor,whichwillincludehisopinionthat:

Quarterlyrevenuesarelikelytofallshortofmanagement’sguidance.

Earningswillbeasmuchas5centspershare(ormorethan10%)belowconsensus.

Wirewolf’shighlyrespectedchieffinancialofficermaybeabouttojoinanother

company.

KnowingthatWirewolfhadalreadyentereditsdeclaredquarter-end“quietperiod”before

reportingearnings(andthuswouldbereluctanttorespondtorumors,etc.),Murphytimesthe

releaseofhisresearchreportspecificallytosensationalizethenegativeaspectsofthe

messagetocreatesignificantdownwardpressureonWirewolf’sstocktothedistinct

advantageofDivisadero’shedgefundclients.Thereport’sconclusionsarebasedon

speculation,notonfact.Thenextday,theresearchreportisbroadcasttoallofDivisadero’s

clientsandtotheusualnewswireservices.

BeforeWirewolf’sinvestorrelationsdepartmentcanassessitsdamageonthefinaltrading

dayofthequarterandrefuteMurphy’sreport,itsstockopenstradingsharplylower,allowing

Divisadero’sclientstocovertheirshortpositionsatsubstantialgains.

Comment:

MurphyviolatedStandardII(B)bytryingtocreateartificialpricevolatilitydesignedtohave

materialimpactonthepriceofanissuer’sstock.Moreover,bylackinganadequatebasisfor

therecommendation,MurphyalsoviolatedStandardV(A).

Example2:

ACMEFuturesExchangeislaunchinganewbondfuturescontract.Toconvinceinvestors,

traders,arbitragers,hedgers,andsoon,touseitscontract,theexchangeattemptsto

demonstratethatithasthebestliquidity.Todoso,itentersintoagreementswithmembersso

thattheycommittoasubstantialminimumtradingvolumeonthenewcontractovera

specificperiodinexchangeforsubstantialreductionsontheirregularcommissions.

Comment:

Theformalliquidityofamarketisdeterminedbytheobligationssetonmarketmakers,but

theactualliquidityofamarketisbetterestimatedbytheactualtradingvolumeandbid-ask

spreads.Attemptstomisleadparticipantsontheactualliquidityofthemarketconstitutea

violationofStandardII(B).Inthisexample,investorshavebeenintentionallymisledto

believetheychosethemostliquidinstrumentforsomespecificpurposeandcouldeventually

seetheactualliquidityofthecontractdryupsuddenlyafterthetermoftheagreementifthe

“pump-priming”strategyfails.IfACMEfullydisclosesitsagreementwithmemberstoboost

transactionsoversomeinitiallaunchperiod,itdoesnotviolateStandardII(B).ACME’s

intentisnottoharminvestorsbutonthecontrarytogivethemabetterservice.Forthat

purpose,itmayengageinaliquidity-pumpingstrategy,butitmustbedisclosed.

Example3:

Amemberisseekingtosellalargepositioninafairlyilliquidstockfromafundhemanages.

Hebuysandsellssharesofthestockbetweenthatfundandanotherhealsomanagestocreate

anappearanceofactivityandstockpriceappreciation,sothatthesaleofthewholeposition

willhavelessmarketimpactandhewillrealizeabetterreturnforthefund’sshareholders.

Comment:

Thetradingactivityismeanttomisleadmarketparticipantsandis,therefore,aviolationof

theStandard.Thefactthathisfundshareholdersgainbythisactiondoesnotchangethefact

thatitisaviolation.

Example4:

Amemberpostsfalseinformationaboutafirmoninternetbulletinboardsandstockchat

facilitiesinanattempttocausethefirm’sstocktoincreaseinprice.

Comment:

ThisisaviolationoftheStandard.

MODULEQUIZ2.3

Tobestevaluateyourperformance,enteryourquizanswersonline.

1.CarrieCarlson,CFA,isacitizenofEmergingMarketCountry(EMC)withnosecuritieslaws

governingtheuseofmaterialnonpublicinformation.CarlsonhasclientsinEmergingMarket

CountryandinNeighboringCountry(NC),whichhasafewpoorlydefinedlawsgoverning

theuseofmaterialnonpublicinformation.IfCarlsonhasmaterialnonpublicinformationona

publiclytradedsecurity,she:

A.caninformherclientsinEMC,butnotNC.

B.canusetheinformationforherNCclientstotheextentpermittedbythelawsofNC.

C.cannotusetheinformationtotradeineitherEMCorNC.

2.Inordertodispelthemyththatemergingmarketstocksareilliquidinvestments,Green

Brothers,a“l(fā)ongonly”emergingmarketfundmanager,hastwoofitssubsidiaries

simultaneouslybuyandsellemergingmarketstocks.Initsmarketingliterature,Green

Brotherscitestheoverallemergingmarketvolumeasevidenceofthemarket’sliquidity.Asa

resultofitsactions,moreinvestorsparticipateintheemergingmarketsfund.Whichofthe

followingismostlikelycorrect?GreenBrothers:

A.didnotviolatetheCodeandStandards.

B.violatedtheCodeandStandardsbymanipulatingthevolumeintheemerging

securitiesmarkets.

C.wouldnothaveviolatedtheCodeandStandardsifthesubsidiariesonlytraded

stocksnotincludedinthefund.

3.Overthepasttwodays,LorraineQuigley,CFA,managerofahedgefund,hasbeen

purchasinglargequantitiesofCraegerIndustrialProducts’commonstockwhileatthesame

timeshortingputoptionsonthesamestock.Quigleydidnotnotifyherclientsofthetrades

althoughtheyareawareofthefund’sgeneralstrategytogeneratereturns.Whichofthe

followingstatementsismostlikelycorrect?Quigley:

A.didnotviolatetheCodeandStandards.

B.violatedtheCodeandStandardsbymanipulatingthepricesofpubliclytraded

securities.

C.violatedtheCodeandStandardsbyfailingtodisclosethetransactionstoclients

beforetheyoccurred.

4.BeforejoiningMitsuiLtd.asananalystcoveringtheelectricalequipmentmanufacturing

industry,PamServais,CFA,workedforInternetSecuritySystems(ISS)whereshehad

accesstononpublicinformation.WhileatISS,Servaislearnedofasevereenvironmental

problemattwofirmshandlingboron-basedcomponents.Itiscommonknowledgethatseven

firmsintheindustryworldwideusethesameboronhandlingtechnique.Thetwofirmsfor

whichServaishasknowledgeannouncedtheproblemlastweekandhadimmediatestock

pricedeclinesof11%and17%,respectively.Theotherfivefirmshavenotmadean

announcement.ServaisissuesareportrecommendingMitsuiclientssellsharesofthe

remainingfivefirms.Servais’sissuanceofthisrecommendation:

A.isnotaviolationofCFAInstituteStandards.

B.isaviolationofCFAInstituteStandardsbecauseitfailstodistinguishbetween

opinionandfact.

C.constitutesaviolationoftheStandardpertainingtotheuseofmaterialnonpublic

information.

5.Zanuatu,anislandnation,doesnothaveanyregulationsprecludingtheuseofnonpublic

information.AlfredoRomerohasafriendandfellowCFAcharterholdertherewithwhomhe

hassharednonpublicinformationregardingfirmsoutsideofhisindustry.Theinformation

concernsseveralfirms’internalearningsandcashflowprojections.Thefriendmay:

A.tradeontheinformationunderthelawsofZanuatu,whichgovernherbehavior.

B.nottradeontheinformationunderCFAInstituteStandards,whichgovernher

behavior.

C.tradeontheinformationunderCFAInstituteStandardssincethefirmsconcernedare

outsideofRomero’sindustry.

6.JuliaGreen,CFA,hasfriendsfromherpreviousemployerwhohavesuggestedthatshe

receiveinformationfromthemviaanInternetchatroom.Inthisway,shereceivesnews

aboutanexcitingnewproductbeingdevelopedbyafirminSingaporethathasthepotential

todoublethefirm’srevenue.Thefirmhasnotrevealedanyinformationregardingthe

producttothepublic.AccordingtotheCodeandStandards,thisinformationis:

A.bothmaterialandnonpublicandGreenmaynottradeonitinSingapore,butmay

tradeonitelsewhere.

B.bothmaterialandnonpublicandGreenmaynottradeonitinanyjurisdiction.

C.publicbyvirtueofitsreleaseinthechatroomandGreenmaytradeonit.

7.WillHunter,CFA,isaportfoliomanageratNVAssetManagersinBaltimore,which

specializesinmanaginglaborunionpensionfundaccounts.AfriendofHunter’swhoisan

investmentbankerasksHuntertopurchasesharesintheirnewIPOsinordertosupportthe

pricelongenoughforinsiderstoliquidatetheirholdings.Hunterrealizesthatthepriceofthe

shareswillalmostcertainlyfalldramaticallyafterhisbuyingsupportceases.NV

management“stronglysuggests”thatHunter“notrocktheboat”andhonortheinvestment

banker’srequestsinceNVhashadalong-standingrelationshipwiththeinvestmentbank.

Hunteragreestomakethepurchases.Hunterhas:

A.notviolatedtheCodeandStandards.

B.violatedtheCodeandStandardsbyattemptingtodistortprices.

C.violatedtheCodeandStandardsbyfailingtoplaceordersintheappropriate

transactionpriority.

MODULE2.4:STANDARDIII(A)

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IIIDutiestoClients

III(A)Loyalty,Prudence,andCare.MembersandCandidateshaveadutyofloyalty

totheirclientsandmustactwithreasonablecareandexerciseprudentjudgment.

MembersandCandidatesmustactforthebenefitoftheirclientsandplacetheirclients’interestsbefore

theiremployer’sortheirowninterests.

Guidance

Clientinterestsalwayscomefirst.AlthoughthisStandarddoesnotimposeafiduciaryduty

onmembersorcandidateswhereonedidnotalreadyexist,itdoesrequiremembersand

candidatestoactintheirclients’bestinterestandrecommendproductsthataresuitablegiven

theirclients’investmentobjectivesandrisktolerances.

Exercisetheprudence,care,skill,anddiligenceunderthecircumstancesthataperson

actinginalikecapacityandfamiliarwithsuchmatterswoulduse.

Managepoolsofclientassetsinaccordancewiththetermsofthegoverning

documents,suchastrustdocumentsorinvestmentmanagementagreements.

Makeinvestmentdecisionsinthecontextofthetotalportfolio.

Informclientsofanylimitationsinanadvisoryrelationship(e.g.,anadvisorwhomay

onlyrecommendherownfirm’sproducts).

Voteproxiesinaninformedandresponsiblemanner.Duetocostbenefit

considerations,itmaynotbenecessarytovoteallproxies.

Clientbrokerage,or“softdollars”or“softcommissions”mustbeusedtobenefitthe

client.

The“client”maybetheinvestingpublicasawholeratherthanaspecificentityor

person.

RecommendedProceduresofCompliance

Submittoclients,atleastquarterly,itemizedstatementsshowingallsecuritiesincustodyand

alldebits,credits,andtransactions.

Encouragefirmstoaddressthesetopicswhendraftingpoliciesandproceduresregarding

fiduciaryduty:

Followapplicablerulesandlaws.

Establishinvestmentobjectivesofclient.Considersuitabilityofportfoliorelativeto

client’sneedsandcircumstances,theinvestment’sbasiccharacteristics,orthebasic

characteristicsofthetotalportfolio.

Diversify.

Dealfairlywithallclientsinregardstoinvestmentactions.

Discloseconflicts.

Disclosecompensationarrangements.

Voteproxiesinthebestinterestofclientsandultimatebeneficiaries.

Maintainconfidentiality.

Seekbestexecution.

Placeclientinterestsfirst.

ApplicationofStandardIII(A)Loyalty,Prudence,andCare

Example1:

FirstCountryBankservesastrusteefortheMillerCompany’spensionplan.Milleristhe

targetofahostiletakeoverattemptbyNewton,Inc.InattemptingtowardoffNewton,

Miller’smanagerspersuadeJulianWiley,aninvestmentmanageratFirstCountryBank,to

purchaseMillercommonstockintheopenmarketfortheemployeepensionplan.Miller’s

officialsindicatethatsuchactionwouldbefavorablyreceivedandwouldprobablyresultin

otheraccountsbeingplacedwiththebank.AlthoughWileybelievesthestocktobe

overvaluedandwouldnotordinarilybuyit,hepurchasesthestocktosupportMiller’s

managers,tomaintainthecompany’sgoodfavor,andtorealizeadditionalnewbusiness.The

heavystockpurchasescauseMiller’smarketpricetorisetosuchalevelthatNewtonretracts

itstakeoverbid.

Comment:

StandardIII(A)requiresthatamemberorcandidate,inevaluatingatakeoverbid,act

prudentlyandsolelyintheinterestsofplanparticipantsandbeneficiaries.Tomeetthis

requirement,amemberorcandidatemustcarefullyevaluatethelong-termprospectsofthe

companyagainsttheshort-termprospectspresentedbythetakeoverofferandbytheabilityto

investelsewhere.Inthisinstance,Wiley,actingonbehalfofhisemployer,thetrustee,clearly

violatedStandardIII(A)byusingthepensionplantoperpetuateexistingmanagement,

perhapstothedetrimentofplanparticipantsandthecompany’sshareholders,andtobenefit

himself.Wiley’sresponsibilitiestotheplanparticipantsandbeneficiariesshouldtake

precedenceoveranytiestocorporatemanagersandself-interest.Adutyexiststoexamine

suchatakeoverofferonitsownmeritsandtomakeanindependentdecision.Theguiding

principleistheappropriatenessoftheinvestmentdecisiontothepensionplan,notwhether

thedecisionbenefitsWileyorthecompanythathiredhim.

Example2:

EmilieRomeisatrustofficerforPagetTrustCompany.Rome’ssupervisorisresponsiblefor

reviewingRome’strustaccounttransactionsandhermonthlyreportsofpersonalstock

transactions.RomehasbeenusingNathanGray,abroker,almostexclusivelyfortrust

accountbrokeragetransactions.WhereGraymakesamarketinstocks,hehasbeengiving

Romealowerpriceforpersonalpurchasesandahigherpriceforsalesthanhegivesto

Rome’strustaccountsandotherinvestors.

Comment:

Romeisviolatingherdutyofloyaltytothebank’strustaccountsbyusingGrayforbrokerage

transactionssimplybecauseGraytradesRome’spersonalaccountonfavorableterms.

Example3:

Amemberusesabrokerforclient-accounttradesthathasrelativelyhighpricesandaverage

researchandexecution.Inreturn,thebrokerpaysfortherentandotheroverheadexpenses

forthemember’sfirm.

Comment:

ThisisaviolationoftheStandardbecausethememberusedclientbrokerageforservicesthat

donotbenefitclientsandfailedto